By MARTIN JONES 03/03/2006
The latest reporting season for With-Profits policies has brought some signs of respite after a period of declining payouts. Strong stockmarkets have led to underlying returns of up to 20% in the case of the stronger funds, resulting in reduced Market Value Adjusters (MVAs) and, in some cases, increased bonus rates.
The table below reflects the most recent press releases of the major providers (Asset Allocation as at 31 December 2005):
| Provider |
Equities & Property |
2005 Return (gross) |
| AXA Sun Life |
60% |
+16% |
| CGNU |
72% |
+18% |
| Legal & General |
67% |
+19% |
| Norwich Union |
60% |
+16% |
| Prudential |
74% |
+20% |
| Standard Life |
45% |
+16% |
However, actual returns to investors will usually have been less than this because of the smoothing process. It appears that the FSA has been putting pressure on providers to reduce MVAs before raising bonus rates. This should be good news for policyholders who are considering whether to transfer to an alternative investment since the surrender/transfer values are likely to be a fairer estimate of the underlying asset value.
With exception of Standard Life, the above providers have had sufficient financial strength to hold a high proportion of equities and property whereas the weak funds are invested mainly in bonds. We can therefore expect to see materially lower returns reported by the likes of NPI and Friends Provident.
| "The circumstances of With-Profits funds vary enormously" |
If you invested in With-Profits funds some years ago you may now be tempted to switch to a more transparent and flexible investment strategy. In the case of those funds with very low equity & property weightings the potential returns are likely to be modest. For example, Scottish Mutual currently has a nil annual bonus rate. However the circumstances of With-Profits funds vary enormously, even for different series within the same provider, so careful analysis is important when making a decision.
Factors that should be considered include:
Transfer/Surrender Values
With-Profits providers can penalise investors exiting in a number of ways, but most commonly by applying an MVA to make the transfer/surrender value lower than the notional ‘fund’ value. An estimate of the underlying fund value is required to see whether you are being offered a fair exit
Prospective Returns & Asset Allocation
Potential returns are dependent on the fund’s asset allocation. The key question is whether this is consistent with your objectives. If your investment horizon is ten years and you can tolerate a moderate level of risk, then an asset mix of 70% cash & bonds, 30% equities is too conservative.
Windfall Bonuses
Holders of Standard Life policies have been tempted to hold on in the expectation of receiving a windfall when the group floats (or is sold), probably later this year. Unfortunately there has yet to be any guidance on how this value will be distributed. Latest estimates of overall value have increased to £5 billion but there are 2.6 million qualifying policyholders so the simple average is around £2,000, although the range is likely to be wide.
Guaranteed Annuity Rates
With-Profits pension funds may have guaranteed annuity rates attached which are much higher than current market rates.